Select Comfort Announces Third-quarter 2013 Results

Select Comfort Corporation (NASDAQ: SCSS) today reported third-quarter 2013 results for the period ended Sept. 28, 2013.

Third-quarter Financial Summary

  • Net sales increased 7% to $264 million, compared to $247 million in the third quarter of 2012.
  • Company-controlled comparable sales declined 1% year-over-year.
  • Operating income was $30.7 million, compared with $40.2 million in the third quarter of 2012. As a percentage of net sales, operating income was 11.6% compared to 16.3% in the third quarter of 2012.
  • Earnings per diluted share were $0.36, compared to $0.46 in the third quarter of 2012.
  • In the quarter, the company opened 16 stores and closed six, ending the quarter with 423 stores.

“The consumer responded positively to our product innovations and exclusive retail experience as evidenced by market-share gains along with favorable operational and customer-focused metrics,” said Shelly Ibach, president and CEO, Select Comfort. “However, our execution was muted by a progressively more challenged macro-economic environment, resulting in performance below expectations.”

Ibach continued, “Given the ongoing economic uncertainty, we are actively managing costs across the company, while continuing to support priorities important to long-term growth and profitability.”

Cash flows from operating activities were $90 million for the first nine months of 2013, compared with $98 million in the prior year. Capital expenditures for the first nine months of 2013 increased to $57.8 million as compared to $36.8 million in 2012, driven by increased investment in stores, technology and product innovation. During the third quarter, the company repurchased 0.4 million shares of its common stock for a total cost of $10 million. As of the end of the quarter, cash, cash equivalents and marketable-debt securities totaled $164 million, and the company had no borrowings under its revolving credit facility.

Financial Outlook
The company is updating its outlook for full-year 2013 GAAP earnings per diluted share from between $1.30 and $1.45 to between $1.14 and $1.22. This updated guidance includes fourth-quarter earnings per diluted share of $0.18 to $0.26, compared to $0.22 in the fourth quarter of 2012. The midpoint of the fourth-quarter outlook assumes low double-digit growth in total net sales and a net increase in store count from 410 at year-end 2012 to between 435 and 445 by year-end 2013.

Conference Call Information
Management will host its regularly scheduled conference call to discuss the company’s results at 5 p.m. EDT (4 p.m. CDT; 2 p.m. PDT) today. To listen to the call, please dial (800) 593-9959 (international participants dial (517) 308-9340) and reference the passcode “Sleep.” To access the webcast, please visit the investor relations area of the Sleep Number website at http://www.sleepnumber.com/eng/aboutus/InvestorRelations.cfm. The webcast replay will remain available for approximately 60 days.

About Select Comfort Corporation
Select Comfort Corporation is leading the industry in delivering an unparalleled sleep experience by offering consumers high-quality, innovative and individualized sleep solutions and services, which include a complete line of SLEEP NUMBER® beds and bedding. The company is the exclusive manufacturer, marketer, retailer and servicer of the revolutionary Sleep Number bed, which allows individuals to adjust the firmness and support of each side at the touch of a button. The company offers further individualization through its solutions-focused line of Sleep Number pillows, sheets and other bedding products. And as the only national specialty-mattress retailer, consumers can take advantage of an enhanced mattress-buying experience at one of more than 400 Sleep Number stores across the country, online at SleepNumber.com, or via phone at (800) Sleep Number or (800) 753-3768.

Forward-looking Statements
Statements used in this news release relating to future plans, events, financial results or performance are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as general and industry economic trends; consumer confidence; the effectiveness of the company’s marketing messages; the efficiency of its advertising and promotional efforts; consumer acceptance of its products, product quality, innovation and brand image; availability of attractive and cost-effective consumer credit options; execution of the company’s retail store distribution strategy; the company’s dependence on significant suppliers, and its ability to maintain relationships with key suppliers, including several sole-source suppliers; the vulnerability of key suppliers to recessionary pressures, labor negotiations, liquidity concerns or other factors; rising commodity costs and other inflationary pressures; industry competition; the company’s ability to continue to improve its product line; warranty expenses; risks of pending and potentially unforeseen litigation; increasing government regulations, which have added or will add cost pressures and process changes to ensure compliance; the adequacy of the company’s management information systems to meet the evolving needs of its business and evolving regulatory standards applicable to data privacy and security; the company’s ability to attract and retain senior leadership and other key employees, including qualified sales professionals; and uncertainties arising from global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events. Additional information concerning these and other risks and uncertainties is contained in the company’s filings with the Securities and Exchange Commission (SEC), including the Annual Report on Form 10-K, and other periodic reports filed with the SEC. The company has no obligation to publicly update or revise any of the forward-looking statements in this news release.

SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
Three Months Ended
September 28,% ofSeptember 29,% of
2013Net Sales2012Net Sales
Net sales $ 263,689 100.0% $ 246,817 100.0%
Cost of sales 97,269 36.9% 86,088 34.9%
Gross profit 166,420 63.1% 160,729 65.1%
Operating expenses:
Sales and marketing 118,307 44.9% 101,718 41.2%
General and administrative 15,150 5.7% 16,936 6.9%
Research and development 2,359 0.9% 1,742 0.7%
CEO transition benefit (143 ) (0.1%) - 0.0%
Asset impairment charges 48 0.0% 108 0.0%
Total operating expenses 135,721 51.5% 120,504 48.8%
Operating income 30,699 11.6% 40,225 16.3%
Other income, net 74 0.0% 73 0.0%
Income before income taxes 30,773 11.7% 40,298 16.3%
Income tax expense 10,514 4.0% 14,089 5.7%
Net income $ 20,259 7.7% $ 26,209 10.6%
Net income per share – basic $ 0.37 $ 0.47
Net income per share – diluted $ 0.36 $ 0.46

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 54,854 55,444
Effect of dilutive securities:
Options 531 1,121
Restricted shares 363 421
Diluted weighted-average shares outstanding 55,748 56,986
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited - in thousands, except per share amounts)
Nine Months Ended
September 28,% ofSeptember 29,% of
2013Net Sales2012Net Sales
Net sales $ 729,317 100.0% $ 714,419 100.0%
Cost of sales 268,083 36.8% 257,820 36.1%
Gross profit 461,234 63.2% 456,599 63.9%
Operating expenses:
Sales and marketing 326,477 44.8% 296,143 41.5%
General and administrative 46,690 6.4% 50,085 7.0%
Research and development 7,475 1.0% 4,288 0.6%
CEO transition (benefit) costs (534 ) (0.1%) 5,595 0.8%
Asset impairment charges 93 0.0% 115 0.0%
Total operating expenses 380,201 52.1% 356,226 49.9%
Operating income 81,033 11.1% 100,373 14.0%
Other income, net 243 0.0% 128 0.0%
Income before income taxes 81,276 11.1% 100,501 14.1%
Income tax expense 27,620 3.8% 34,902 4.9%
Net income $ 53,656 7.4% $ 65,599 9.2%
Net income per share – basic $ 0.98 $ 1.18
Net income per share – diluted $ 0.96 $ 1.15

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 54,992 55,601
Effect of dilutive securities:
Options 589 1,085
Restricted shares 409 516
Diluted weighted-average shares outstanding 55,990 57,202
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
subject to reclassification
(unaudited)
September 28,December 29,
20132012
Assets
Current assets:
Cash and cash equivalents $ 81,301 $ 87,915
Marketable debt securities – current 57,407 51,264

Accounts receivable, net of allowance for doubtful accounts of $448 and $348, respectively

15,245 16,613
Inventories 41,311 35,564
Prepaid expenses 8,894 4,299
Deferred income taxes 5,373 5,401
Other current assets 10,935 9,522
Total current assets 220,466 210,578
Non-current assets:
Marketable debt securities – non-current 25,683 38,642
Property and equipment, net 117,793 79,356
Goodwill and intangible assets, net 17,034 2,881
Deferred income taxes 4,249 8,511
Other assets 4,621 2,053
Total assets $ 389,846 $ 342,021
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $ 75,744 $ 67,703
Customer prepayments 15,291 15,194
Accrued sales returns 9,872 5,330
Compensation and benefits 14,960 21,597
Taxes and withholding 17,179 9,282
Other current liabilities 12,266 13,955
Total current liabilities 145,312 133,061
Non-current liabilities:
Warranty liabilities 1,608 1,457
Other long-term liabilities 16,738 13,806
Total non-current liabilities 18,346 15,263
Total liabilities 163,658 148,324
Shareholders’ equity:

Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding

- -

Common stock, $0.01 par value; 142,500 shares authorized, 55,242 and 55,903 shares issued and outstanding, respectively

552 559
Additional paid-in capital 12,763 33,923
Retained earnings 212,851 159,195
Accumulated other comprehensive income 22 20
Total shareholders’ equity 226,188 193,697
Total liabilities and shareholders’ equity $ 389,846 $ 342,021
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited - in thousands)
subject to reclassification
Nine Months Ended
September 28,September 29,
20132012
Cash flows from operating activities:
Net income $ 53,656 $ 65,599

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 22,199 14,411
Stock-based compensation 3,058 9,570
Net (gain) loss on disposals and impairments of assets (10 ) 86
Excess tax benefits from stock-based compensation (3,088 ) (4,947 )
Deferred income taxes 4,288 (737 )
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable 1,717 (1,237 )
Inventories (5,069 ) (4,146 )
Income taxes 7,114 10,715
Prepaid expenses and other assets (5,144 ) (6,031 )
Accounts payable 11,029 10,565
Customer prepayments 97 1,882
Accrued compensation and benefits (5,607 ) (6,588 )
Other taxes and withholding 1,504 2,291
Warranty liabilities (1,218 ) (1,247 )
Other accruals and liabilities 5,556 7,450
Net cash provided by operating activities 90,082 97,636
Cash flows from investing activities:
Purchases of property and equipment (57,820 ) (36,816 )
Proceeds from sales of property and equipment 117 42
Investments in marketable debt securities (26,041 ) (63,240 )
Proceeds from maturities of marketable debt securities 31,973 10,103
Acquisition of business (15,500 ) -
Investment in non-marketable equity securities (3,000 ) -
Net cash used in investing activities (70,271 ) (89,911 )
Cash flows from financing activities:
Net (decrease) increase in short-term borrowings (4,567 ) 2,323
Repurchases of common stock (32,054 ) (24,071 )
Proceeds from issuance of common stock 7,108 3,279
Excess tax benefits from stock-based compensation 3,088 4,947
Debt issuance costs - (50 )
Net cash used in financing activities (26,425 ) (13,572 )
Net decrease in cash and cash equivalents (6,614 ) (5,847 )
Cash and cash equivalents, at beginning of period 87,915 116,255
Cash and cash equivalents, at end of period $ 81,301 $ 110,408
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
Three Months EndedNine Months Ended
September 28,September 29,September 28,September 29,
2013201220132012
Percent of sales:
Retail 90.7 % 90.9 % 89.2 % 89.3 %
Direct and E-Commerce 6.1 % 6.9 % 6.7 % 7.5 %
Wholesale/other 3.2 % 2.2 % 4.1 % 3.2 %
Total 100.0 % 100.0 % 100.0 % 100.0 %
Sales growth rates:
Retail comparable-store sales (1 %) 21 % (5 %) 28 %
Direct and E-Commerce (6 %) 14 % (8 %) 13 %
Company-Controlled comparable sales change (1 %) 21 % (5 %) 27 %
Net new/(closed) stores 7 % 4 % 6 % 3 %
Total Company-Controlled Channel 6 % 25 % 1 % 30 %
Wholesale/other 55 % (15 %) 31 % 9 %
Total 7 % 24 % 2 % 29 %
Stores open:
Beginning of period 413 381 410 381
Opened 16 15 43 37
Closed (6 ) (2 ) (30 ) (24 )
End of period 423 394 423 394
Other metrics:
Average sales per store ($ in 000's) 1 $ 2,102 $ 2,108
Average sales per square foot 1 $ 1,131 $ 1,314
Stores > $1 million net sales 1 97 % 98 %
Stores > $2 million net sales 1 47 % 48 %
Average net sales per mattress unit - Company-Controlled Channel 2 $ 3,304 $ 3,208 $ 3,207 $ 2,993

1 Trailing twelve months for stores open at least one year.

2 Represents Company-Controlled Channel total net sales divided by Company-Controlled Channel mattress units. The previously reported metric "Average mattress sales per mattress unit - Company-Controlled Channel" included only net sales from mattresses and mattress bases. Previously reported amounts have been reclassified to conform to the current-year presentation.

SELECT COMFORT CORPORATION AND SUBSIDIARIES
Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
(in thousands)

'We define earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes Adjusted EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure:

Three Months EndedTrailing-Twelve Months Ended
September 28,September 29,September 28,September 29,
2013201220132012
Net income $ 20,259 $ 26,209 $ 66,151 $ 80,969
Income tax expense 10,514 14,089 34,629 39,506
Interest expense 14 16 53 122
Depreciation and amortization 7,774 5,126 26,932 17,826
Stock-based compensation 1,067 1,200 3,796 10,866
Asset impairments 48 108 126 121
Adjusted EBITDA $ 39,676 $ 46,748 $ 131,687 $ 149,410
Note - Our Adjusted EBITDA calculation is considered a non-GAAP financial measure and is not in accordance with, or preferable to, "as reported," or GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.
GAAP - generally accepted accounting principles
SELECT COMFORT CORPORATION AND SUBSIDIARIES
Reported to Adjusted Statements of Operations Data Reconciliation
(in thousands, except per share amounts)
Three Months Ended
September 28, 2013September 29, 2012
CEO
Transition
As ReportedBenefit(1)As AdjustedAs Reported
Operating income $ 30,699 $ (143 ) $ 30,556 $ 40,225
Other income, net 74 - 74 73
Income before income taxes 30,773 (143 ) 30,630 40,298
Income tax expense(2) 10,514 (49 ) 10,465 14,089
Net income $ 20,259 $ (94 ) $ 20,165 $ 26,209
Net income per share –
Basic $ 0.37 $ 0.00 $ 0.37 $ 0.47
Diluted $ 0.36 $ 0.00 $ 0.36 $ 0.46
Basic Shares 54,854 54,854 54,854 55,444
Diluted Shares 55,748 55,748 55,748 56,986
Nine Months Ended
September 28, 2013September 29, 2012
CEOCEO
TransitionTransition
As ReportedBenefit(1)As AdjustedAs ReportedCosts(1)As Adjusted
Operating income $ 81,033 $ (534 ) $ 80,499 $ 100,373 $ 5,595 $ 105,968
Other income, net 243 - 243 128 - 128
Income before income taxes 81,276 (534 ) 80,742 100,501 5,595 106,096
Income tax expense(2) 27,620 (183 ) 27,437 34,902 1,925 36,827
Net income $ 53,656 $ (351 ) $ 53,305 $ 65,599 $ 3,670 $ 69,269
Net income per share –
Basic $ 0.98 $ (0.01 ) $ 0.97 $ 1.18 $ 0.07 $ 1.25
Diluted $ 0.96 $ (0.01 ) $ 0.95 $ 1.15 $ 0.06 $ 1.21
Basic Shares 54,992 54,992 54,992 55,601 55,601 55,601
Diluted Shares 55,990 55,990 55,990 57,202 57,202 57,202
(1) In February 2012, we announced that William R. McLaughlin, then President and CEO, would retire from the Company effective June 1, 2012. In recognition of Mr. McLaughlin’s contributions, the Compensation Committee approved the modification of Mr. McLaughlin’s currently unvested stock awards, including performance-based stock awards. As a result of these modifications, we recorded incremental non-cash compensation of $5.6 million in the first nine months of 2012. The performance-based stock awards are subject to applicable adjustments through 2014 based on actual performance versus performance targets. In the three months and nine months ended September 28, 2013, we recorded a non-cash compensation benefit of $0.1 million and $0.5 million, respectively, resulting from performance-based stock award adjustments.
(2) Reflects effective income tax rate, before discrete adjustments, of 34.3% for 2013 and 34.4% for 2012.

Note -

Our "as adjusted" data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, "as reported," or GAAP financial data. However, we are providing this information as we believe it facilitates year-over-year comparisons for investors and financial analysts.

GAAP -

generally accepted accounting principles

Contacts:

Select Comfort Corporation
Media Contact:
Gabby Nelson, 763-551-7460
publicrelations@selectcomfort.com
or
Investor Contact:
Dave Schwantes, 763-551-7498
investorrelations@selectcomfort.com
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